Norway’s Oil Fund Makes Every Norwegian a Kroner Millionaire

While oil and graft frequently go hand in hand, such is not the case in Norway, where on 6 January the country’s Government Pension Fund – Global, more commonly referred to as the Oljefondet, throughcareful investment has made every Norwegian a millionaire in the country’s currency, the kroner. Norway’s success with its Oljefondet stands in stark contrast to Britain, with whom it jointly developed the North Sea after oil was found there in 1969.

The Oljefondet, set up in 1990, is now the world’s biggest sovereign wealth fund, with its income surging thanks to high oil and gas prices. Norway now pumps roughly 1.9 million barrels of oil per day and is the world’s number 14 oil exporter. The pension fund now owns around 1 percent of the world’s stocks, as well as bonds and real estate from London to Paris to San Francisco, where the Oljefondet spent roughly $500 million to purchase a 47.5 percent share in a 36-storey building in San Francisco’s financial district, along with picking up real estate in Washington DC.

According to the website of the Norges Bank, which manages the fund, the Oljefondet reached $828.66 billion, and in the third quarter of 2013 returned 5.0 percent, or $37.1 billion.

Norwegians now enjoy the fourth highest gross domestic product per-capita in the world, with Norway ranking as the world’s second wealthiest country in monetary value, with the largest capital reserve per capita of any nation and net external creditor of debt.

Export revenues from oil and gas have risen to almost 50 percent of Norway’s total exports and constitute more than 20 percent of the country’s GDP. But it is not a member of OPEC.

Norway has sought to avoid the boom and bust cycle by investing the cash abroad, rather than at home. Governments can spend 4 percent of the fund in Norway each year, slightly more than the annual return on investment. The Oljefondet is now equivalent to 183 percent of Norway’s 2013 gross domestic product and is expected to peak at 220 percent around 2030. In the wake of its U.S. real estate purchases the fund placed approximately $8.1 billion in real estate and the Oljefondet has been given permission by Parliament to invest up to five percent of the total fund in real estate.

Still not everyone is so upbeat about the future of the Oljefondet. Swedbank First Securities chief strategist Peter Hermanrud dourly observed, “What we make a living from in Norway is more vulnerable to competition. It may be that an increasing number of companies want to explore for gas onshore in the U.S. rather than offshore in Norway. We’ve experienced an acute shortage of rigs, seismic vessels and engineers in recent years. This has occurred concurrently with a sharp increase in investments by oil companies. The current problem is oil companies’ lack of capital and investment willingness.”

While economists have every right to be cautious in the their predictions, consider the following statistics from the U.S. government’s Energy Information Administration: Norway is Europe’s largest oil producer, the world’s second largest natural gas exporter, and is an important supplier of both oil and natural gas to other European countries; Norway is the largest oil producer and exporter in Western Europe; Norway is the second largest exporter of natural gas after Russia and ranks fourth in world natural gas production.

Many British economists are looking wistfully at the Oljefondet’s roaring success, contrasting it with the reckless spending habits of a succession of governments that largely squandered the country’s North Sea oil windfall. In a 2008 study of British profligacy entitled “Dude, where’s my oil money?” PricewaterhouseCoopers chief economist John Hawksworth estimated that had all the North Sea revenue been set aside and invested in ultra-safe assets it would have been worth $737 billion by 2008, but acknowledged that is a very conservative estimate: Sukhdev Johal, professor of accounting at Queen Mary University of London, thinks the total might well have been $1.39 trillion by now.

Accordingly, nations such as Kazakhstan, Angola and Mozambique, all on the cusp of major oil revenue income, have been provided with a cautionary tale from the North Sea.

Congratulations Norway on proving that a well managed Sovereign Wealth Fund can be both sustainable and successful at the same time. As for the other funds the model stands for them to replicate but given the cultural differences and corruption prevalent across the world, perhaps the solution is outsourcing. The mode would allow other countries to hire the Norwegian fund to design a fund after their own. Maybe run a portion for them, why reinvent the wheel, just copy it.

westcoastdog January 21, 2014 at 10:41 am

Millionaire? $828 billion divided by 5 million population equals $165,000, a good down payment for a house in San Francisco.